Good day, ladies and gentlemen, and welcome to the Dunkin' Brands Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Stacey Caravella, Director of Investor Relations. Please go ahead.

Stacey Caravella

Thank you, operator, and good morning, everyone. With me today are Dunkin' Brands Chief Executive Officer and Dunkin' Donuts President, Nigel Travis; Dunkin' Brands Chief Global Strategy Officer, Neil Moses; and Dunkin' Brands Chief Financial Officer, Paul Carbone, each of whom will speak on the call. Additionally, Dunkin' Brands Chief Global Marketing and Innovation Officer, John Costello, is here, and he'll be available for questions during the Q&A session. Today's call is being webcast live and recorded for replay.

Before I turn the call over to Nigel, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made on the call. Our release can be found on our website, investor.dunkinbrands.com, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures.

Now, I'd like to turn the call over to Nigel Travis.

Nigel Travis

Well, good morning, everyone, and thank you for joining us on our second quarter results call.

Before I begin, I'd like to recognize the recent management change that we announced in June. Neil Moses, formerly Chief Financial Officer, is now Chief Global Strategy Officer. And Paul Carbone, formerly Vice President, Finance and Strategy, is now Chief Financial Officer. These moves recognize Neil's and Paul's terrific contribution to the success of Dunkin' Brands and also further solidify our world-class management team and position us well for the future. Later in the call, Paul will cover our corporate finance announcements that were made in our release this morning.

While the last few months have certainly been busy, and tomorrow marks our 1-year anniversary as a public-traded company, it seems only like yesterday that we were actually at NASDAQ, saying -- talking about our IPO. But our strong performance this past year clearly demonstrates the platform for growth that we laid out at the time of our IPO. Our asset-light, nearly 100% franchise model continues to generate consistent revenue growth and higher margins. We continue to further our unique asset-light model with last week's announcement that we're closing the Baskin-Robbins Peterborough, Ontario, Canada ice cream manufacturing plant this October, and we'll shift production to existing suppliers. This move will enable us to better support future growth of one of our fastest growing segments, which is Baskin-Robbins International.

Neil, in his role of having responsibility for supply chain, will speak in greater detail on this initiative later during the call. We continue to capitalize on the significant global growth opportunities for both brands and added 140 net new units globally during the quarter, passing the 17,000 restaurant milestone.

At the restaurant level, our component Dunkin' Donuts U.S. unit economics are driving strong and high-quality demand, and our relentless focus on franchisee profitability has resulted in an average of 25% plus cash-on-cash returns for franchisees that opened their restaurants in the past 2 years. Best-in-class product and marketing innovation coupled with strong operational execution by our franchisees and licensees worldwide is driving comparable store sales increases across all 4 business segments. And, of course, all this was achieved against a backdrop of an increasingly challenging economic environment across the world.

Now let's look at our Q2 performance in greater detail. So I'll walk you through our results in order of our strategic initiatives. As we always do, firstly, let's look at Dunkin' Donuts U.S. comp performance.

Dunkin' U.S. delivered a solid 4% comp store sales increase during the quarter. This was driven by growth in cold beverages, innovative Breakfast and Bakery Sandwiches limited time offers and the continued success of K-Cups in our restaurants. We had increases in both traffic and ticket across all day parts. The ticket increases were due to increased sales of mix of cold and frozen beverages as well as Breakfast and Bakery Sandwiches.

The cold beverage category was led by both the Men in Black 3 movie product tie-in with Black Cocoa Creme Iced Coffee in May and the national $0.99 Iced Tea offer in April. We continued our very successful streak of highly successful and innovative breakfast sandwich rollouts with our new Breakfast Burrito, which was available in both steak and veggie varieties.

Our Breakfast Sandwiches are a powerful complement to our beverage lineup, and I'd like to remind you that they are nearly as profitable for our franchisees as our beverages. Our new Bakery Sandwich line continues to drive traffic and sales in the p.m. day part, and we added a roast beef sandwich to this lineup in key Northeastern markets, which provided a nice boost to the category in June.

New formulations for both bagels and muffins enhanced existing product offerings, improved flavor varieties and brought news to key bakery categories. We also expanded our frozen beverage line to feature Frozen Coffee in mocha and caramel flavors. Frozen Coffee is the new name for our Coffee Coolatta.

K-Cups continue to be a significant driver of comps in Q2, representing approximately 40% of our total Dunkin' U.S. comp increase. We continue to see strength across all regions for the product, but especially on a per-store basis in new markets, and of course that's very important.

We, also in the period, launched our first limited-time-offer flavor with Mocha coffee K-Cups in June. In terms of advertising, the What Are You Drinkin' campaign is driving positive trends in our Coffee business as we continue to expand the campaign across the coffee category and to localize the message in key markets.

Linked to that, we also signed Super Bowl MVP and winning quarterback Eli Manning to be our marketing spokesperson for Dunkin' Donuts in the New York market. Our national advertising was up over the second quarter of 2011, in continuous support of our westward store expansion. And some of you may have seen Dunkin' Donuts featured on the dasher boards in Los Angeles during the NHL Stanley Cup Playoffs on NBC in June.

So let me sum up where we are. Our business fundamentals are strong, we have positive underlying trends, and we continue to expect Dunkin' Donuts U.S. annual comp store sales growth of between 4% and 5% for the year. We have strong marketing and product plans for Q3 and Q4 that we believe position us well to roll over our toughest comps in 2011.

You'll see a diverse range of proven product news across Breakfast Sandwiches, bakery products and Bakery Sandwiches, as well as, of course, the beverages. We have strong media plans and multiple advertising levers to pull to drive sales, and our advertising spend is weighted more heavily towards the second half of the year.

We also have the very exciting launch of our mobile app in Q3. By the way, anyone who's planning to ask me detailed questions about that, I'll tell you now, I'm not going to tell you anything about it apart from the fact we're launching it in Q3.

Now what I will tell you is that to help us do this, we now have 6,000 restaurants on our standardized POS platform. I think that's a real achievement. And, of course, on K-Cups we have new merchandising plans and limited-time-offer flavors that we'll roll out in the second half of the year. So I think we have, as I say, some very exciting plans for Q3 and Q4.

Let's now turn to Dunkin' Donuts U.S. contiguous store expansions. And really the heart of that is our westward expansion plans. We had a solid quarter in terms of Dunkin' Donuts U.S. development. While net new U.S. was down 20 from the second quarter last year, we opened 71 gross restaurants, which was in line with last year. The increasing closings was due to the termination of a contract with a gas and convenience operation in Kentucky. This is actually very good news for future developments as the termination of the agreement unlocks the market by enabling us to sell store development agreements for traditional development.

Of the 71 gross openings, 33% were in core markets, 25% in the established markets, 33% in the emerging markets and 9% in the West. During the period, we opened our first store in Arkansas and saw very encouraging numbers. On a year-to-date basis, we've added 64 net new units versus 66 last year at the same time, and we completed 264 remodels versus 249 last year. Of course, remodels are very important in keeping our chain up to date.

Our development is in line with where we were at this time last year, a year when we added 243 net new units for Dunkin' U.S. And we feel we've got an excellent line of sight into our back-half development, leading us to be confident that we will meet our development goal of between 260 and 280 net new stores in 2012.

Our development is typically back-end loaded, which is related to the SDA versus infill location strategy that we discussed on last quarter's earnings call. Many of those infill type locations in core and established markets are typically in-year deals and therefore are more likely to be completed in third and fourth quarters.

In terms of the development pipeline for the next several years, demand for our brand continues to be incredibly strong and of high quality. The markets that we open for SDA sales in 2011 have strong sales momentum, and markets are selling out quickly. We're beginning to open new areas for SDA sales in parts of Kansas, Nevada, Utah and the remainder of Texas. Between the high-quality franchising interest and strong consumer demand for the brand, we feel very good about the results that our strategic contiguous development approach has yielded. Couple this with the unit economics for our restaurants opened over the past 2 years that are very attractive. And for those who missed it, for more information on this topic, please see the deck from our first-ever Investor and Analyst Day, which is shown on our Investor Relations website.

Let me now turn to our international business, and I'll start with Baskin-Robbins performance. Baskin-Robbins International had a 1.5% comp store sales growth during the quarter, a very strong segment profit.

From a regional perspective, we saw strong performances in Korea, the Middle East and China, while Japan struggled during the quarter. Baskin International participated in the Men in Black 3 movie tie-in similar to our domestic business that I mentioned earlier, and it offered Lunar Cheesecake-flavored ice cream and innovative cake designs.

In China, we launched the LeBron James king cone, and we continue to see great results from the revolutionary peace cake in Korea. During the quarter, we announced plans to nearly double our presence in the U.K. over the next 3 years off of our current base of 100 restaurants.

Moving to Dunkin' International. They had a solid 3.5% comp store sales growth in Q2. Korea had a solid quarter and is a result of its sharpened marketing plans and operational and supply chain enhancements. Giorgio Minardi, our new President of International, has been spending a lot of time on the supply chain for Dunkin' International as a whole, and this will help drive our franchisee and licensees profitability. And I really do think, as we discussed at the Analyst Day, this is a very key building block for the future just as it was for our domestic business.

During the quarter, we opened our first Dunkin' restaurants in Guatemala and in India. In that country, our franchisee partner, Jubilant, who is very well known to many of you, has 3 locations opened at the end of Q3, all of which are off to a strong start. We really are very excited about our long-term opportunity in India with Dunkin' Donuts.

As we continue to build the pipeline for future international growth by signing deals for significant development expansion in Latin America, in Chile, Peru and Colombia, and we also announced new regions of Germany, with the first one being in the Frankfurt area. One comment on our European exposure: While it's pretty low, less than 1% of our total EBITDA, which of course at the moment is a good thing in today's economic environment, we believe there's significant long-term opportunity for us to build on our base in countries such as the U.K., Germany, Spain and, of course, one country outside the European community, which is Russia. With the increased rigor and discipline that Giorgio Minardi and the development team are bringing to international expansion, I believe we are positioning ourselves to take great advantage of many, many worldwide opportunities in the future and reach our long-term growth targets for both brands internationally.

Let's move now back to the U.S. and Baskin-Robbins. They had another strong store sales performance in the second quarter with a 4.6% comp store sales growth with approximately 250 basis points of positive impact from weather.

Product news around the return of signature flavors of the month included Lunar Cheesecake as part of the Men in Black 3 promotion, and Strawberry Lemonade drove comps, as well as Mother's and Father's Day custom-cake offers. And one thing I'd say is we do very well on days like Mother's Day and Father's Day, and cakes really are the heart of that promotional opportunity.

We also launched new beverages, such as the Triple Chocolate Cappy Blast and the Tropical Banana Smoothie. The business had positive net development for the quarter with 5 net openings. While we're still optimizing the store base by closing or transferring underperforming locations, the decline in the store base continues to slow with the recent positive momentum of the business.

I remain excited about the turnaround of Baskin-Robbins in the U.S. Franchisees are engaged, we now have a standardized POS system, marketing is sharpened and operations improve every day. I firmly believe that in the long term, Baskin-Robbins U.S. will be a slow-growth business for us.

We have some exciting news to announce for Baskin-Robbins U.S. and Dunkin' coffee fans in California. We will begin to sell Dunkin' K-Cups in our Baskin-Robbins restaurants in California only later this year. Our packaged coffee and grocery outlets does extremely well in that state and is instrumental in our westward expansion plans for Dunkin' U.S. as it gets our consumers hooked on our coffee taste profile.

We see this as a similar initiative that will help drive sales and profitability in our Baskin-Robbins U.S. restaurants in California.

And now I'd like to turn the call over to Neil to talk about the supply chain for Baskin-Robbins International.

Neil Moses

Thanks, Nigel. One of our key strategic initiatives at Dunkin' Brands is transforming our supply chain from a support function to a growth enabler for Dunkin' Donuts and Baskin-Robbins and both domestically and internationally.

Over the past couple of years, we have made significant progress on this strategic initiative, including our announcements earlier this year regarding our move to flat national invoice pricing for all Dunkin' Donuts U.S. restaurants. This initiative is driving accelerated contiguous development for our Dunkin' Donuts U.S. business segment.

Last week, we announced another major supply chain initiative for our second-largest business segment, Baskin-Robbins International. We have decided to close our Peterborough, Ontario, Canada ice cream manufacturing plant and outsource future production. The plant supplies ice cream to about 1/3 of the brand's international locations, which represent more than half of this business segment's profitability.

Baskin-Robbins International is one of our fastest growing segments, and the Peterborough plant has been running 24/7 and is at capacity.

Moving our international ice cream production to a trusted long-term dairy manufacturing partner, Dean Foods, is aligned with our asset-light model and will generate significant annual savings for the company. Most importantly, this transition will enable us to better support our growing International Baskin-Robbins business, including the flexibility of using production from the many Dean plants here in the United States.

Ramp down of the Peterborough plant will begin in late July with closure expected by mid-October. We will continue to sell ice cream to our international franchisees, but rather than producing it ourselves, we will purchase the ice cream made according to our proprietary recipes from Dean Foods and then resell it to our international franchisees. This differs from our Baskin-Robbins Domestic business, which is a royalty-based business.

Here in the U.S., Dean Foods sells Baskin-Robbins ice cream directly to our franchisees, and we make a royalty on sales at the restaurant level. We are not shifting to this model for the Baskin-Robbins International segment.

As a result of the closing, we estimate onetime charges of between $16 million and $18 million, of which $4 million is a noncash charge. Of that estimated total, during the second quarter, we had $3.7 million in charges, of which $1.1 million was noncash. We expect annual savings of approximately $4 million to $5 million beginning in 2013.

One other important update on supply chain initiatives, this one for Dunkin' U.S. The end of June marked the 6-month milestone on the road to flat national invoice pricing. We will have uniform product costs in 3 years' time, and franchisees out West will see at least 200 basis points in cost of goods savings by the end of this year. They are actually tracking ahead of plan as of the end of June and have seen between 130 and 170 basis points of improvement thus far. As a reminder, our franchisees in the West will see the greatest impact from the implementation of flat national pricing.

And now, I'll turn it over to Paul to walk through the financials.

Paul C. Carbone

Thanks, Neil, and good morning, everyone. Let me start with Dunkin' Brands overall results. Global system-wide sales grew 6.9% or 7.6% on a constant currency basis. Growth in the second quarter was primarily attributable to Dunkin' Donuts U.S. comp store sales growth, global store developments and growth in the Baskin-Robbins International sales.

Revenues grew by 9.8% compared to the second quarter of 2011, primarily from increased royalty income driven by the increase in system-wide sales. Operating income decreased $15.7 million or 25% from the second quarter of 2011 as a result of the $20.7 million increase in legal reserves for the Bertico litigation in Québec, Canada, and the $3.7 million charge for the Peterborough plant closing, offset by the increase in revenues.

Adjusted operating income increased $9.7 million or 14% from the second quarter of last year, primarily from the increase in revenues and continued G&A leverage. Our adjusted operating income margin was 45.8% for the quarter, up from 44.1% in the second quarter of last year, an increase of 170 basis points.

Net income was up $1.3 million compared to the second quarter of 2011. Lower operating income was more than offset by a $12.3 million decline in interest expense as a result of the refinancing that we completed last year and the repayment of a portion of our debt with the proceeds from our IPO. Additionally, the prior year included $5.2 million charge incurred with the connection with the debt refinancing.

Adjusted net income was up $15.6 million or more than 63% compared to the second quarter of 2011 as a result of the increase in adjusted operating income and the decrease in interest expense net of an increase in tax expense. At the end of the second quarter, we had debt to adjusted EBITDA ratio of 4.1:1. During the quarter, our effective tax rate was 38%.

During the quarter, we generated approximately $37 million in free cash flow and ended the quarter with $219 million in cash on the balance sheet. Of this $219 million, $83 million represents cash associated with our gift card programs and our marketing fund balances. We used $18 million in cash during the quarter to pay our second quarter cash dividend to shareholders.

From an earnings per share perspective, we are reporting pro forma shares outstanding for the second quarter of last year, which reflects the conversion of L class shares to common as if the conversion had occurred at the beginning of the period. We have also calculated EPS using our adjusted net income for both years. We refer to this EPS metric as diluted adjusted earnings per pro forma common share.

Diluted adjusting earnings per pro forma common share were $0.33 compared to $0.25 for the same time -- same quarter last year. The 32% increase in EPS year-over-year was less than the increase in our adjusted net income as a result of the additional shares we issued in our IPO. Our diluted weighted average shares for the quarter were 122 million.

All right. Let's look more closely at each of our 4 segments' performance during the quarter. I'll start with the Dunkin' Donuts U.S. business. Revenues of approximately $123 million represented an increase of over 11% year-over-year. The increase in revenue was primarily driven by an increase in royalty income as the result of a nearly 8% increase in system-wide sales. Segment profit increased to approximately $90 million, an increase of 9% over last year. The increase was driven by the revenue growth, partially offset by continued investment in our Dunkin' Donuts U.S. business.

Baskin-Robbins International system-wide sales increased approximately 6% year-over-year, driven by strong sales in Korea. On a constant currency basis, system-wide sales increased approximately 8%. Revenues for Baskin-Robbins International increased 12% year-over-year to approximately $30 million, fueled by strong ice cream sales in the Middle East. Segment profit increased 15% to nearly $12 million, resulting from an increase in net margin on ice cream sales also driven by the strong sales that I mentioned in the Middle East. During the quarter, Baskin-Robbins International franchisees and licensees added 87 net new locations.

Dunkin' Donuts International system-wide sales grew 1.5% for the quarter. On a constant currency basis, system-wide sales increased by approximately 6%. Revenues increased 1% year-over-year due to an increase in royalty income driven by the increase in system-wide sales. Profit for the segment declined $1.2 million year-over-year to $1.9 million. This is mostly driven by continued investment in the Dunkin' Donuts International operational infrastructure to support the business. For the quarter, Dunkin' Donuts International opened 29 net new units, an increase of 6 net new units as compared to the prior year.

Baskin-Robbins U.S. segment revenue was flat with the prior year at approximately $13 million with gains in royalty income resulting from a 5% system-wide sales increase, offset by declines in licensing income and rental income. Profits for the Baskin-Robbins U.S. segment increased 25% year-over-year as a result of prior year investments in a standardized POS system and brand-building advertising.

So now let me review our 2012 targets. As Nigel mentioned earlier, we continue to expect Dunkin' Donuts U.S. comp store sales growth to be in the range of 4% to 5%. We continue to expect Baskin-Robbins U.S. comp store sales growth to be in the range of 2% to 4%.

Turning to development. We are increasing our global growth target to between 600 and 700 net new units, up from the previous 550 to 650. We expect that Dunkin' Donuts U.S. will add between 260 and 280 net new restaurants, and Baskin-Robbins U.S. will close between 40 and 60 restaurants.

Internationally, we are targeting to open 400 to 450 net new units between the 2 brands, an increase from the previous range of 350 to 450. You can continue to expect the international development will be weighted towards the Baskin-Robbins brand.

We continue to expect revenue growth of between 7% and 8% with adjusted operating income growth of between 12% and 14%, both of which are off a 52-week year in 2011. This morning, we are increasing our range for adjusted earnings per share to $1.22 to $1.25, which would represent a 30% to 33% growth over adjusted earnings per share of $0.94 in 2011 and is an increase from our previous target of $1.21 to $1.24.

Now let me talk about the capital structure and share repurchase we announced this morning. Lastly, in our press release, we announced that the Board of Directors authorized a program to repurchase up to an aggregate $500 million of outstanding common stock. This authorization is granted for a 2-year period.

Additionally, we announced that we intend to increase our senior secured credit facility by approximately $400 million and to seek certain amendments to the facility. The facility is expected to be structured to allow the company the option to draw down the incremental term loan during a specified period of time to use for returning capital to shareholders as well as general corporate purposes.

We believe that our franchise business model can support leverage in the range of 4.5x to 5.5x adjusted EBITDA, and by seeking this increase, we will be able to get back into that leverage ratio range under our existing credit facility.

And now, I'd like to open up the call for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Glass.

John S. Glass - Morgan Stanley, Research Division

It's always helpful if you are willing to parse out the traffic versus the ticket on the non-K-Cup business, if you could do that. And secondarily, if you can talk a little bit about how the macro may impact that business. Have you seen a pretty consistent trend in traffic? I would think the warm weather would have helped, all else being equal. Maybe that's a false assumption, maybe you could talk about that as well.

Nigel Travis

I think we actually missed the first part of what you were saying. I think somehow you're still on mute, but I think we've got the gist of it. So if we don't cover the question fully, please come back and, as I know you will, and ask us to follow up. We don't tend to break down detail about traffic and ticket. I think we've continually said that. But we -- what we try to do is give general guidance, and there's no doubt we saw growth in traffic and ticket during the quarter. And as I said in my remarks, we saw it in both the a.m. and probably more importantly the p.m. business. I think we feel that our business has performed all year very steadily, very consistently. We have seen traffic growth in quarter 1 and quarter 2. And there's no doubt that the economy has slowed down based on all the external indicators. And I guess there's more numbers coming out as we sit here at 8:30 this morning. So I don't know quite what happened in those numbers, but basically all the numbers show a deteriorating picture. But we feel our business continues to grow. As we've shown, back in 2008, 2009, we have a very resilient business in terms of traffic and ticket. And also I think a point I want to emphasize, because it's a very important point, is unlike some other chains -- if our business did go down, which, of course, it hasn't, if it did go down, we have a very good business model in downturns because we aren't exposed to commodity increases like many other chains are in a direct way because we are a totally franchised business. I think that I covered your questions. But if I didn't, please push back.

John S. Glass - Morgan Stanley, Research Division

Well, the question, maybe the part that dropped out, I was trying to understand if trends, traffic trends, even though you're not going to maybe talk about them specifically, have changed, the rate of change has changed during the quarter. Have you seen traffic sequentially slow in the business, for example? And as a counter to that, I would have thought warm weather would have been a benefit just given the beverage sales uptick. Have you -- do you normally see that during a particularly hot season as you did this quarter?

Nigel Travis

Well, yes, I mean, basically I think our analysis of the weather, which we've spent a lot of time on as you saw from what I said about Baskin-Robbins, basically shows that there was negligible impact either way. But we feel good about our traffic trends. I'd say that our traffic trends, as I said before, are very steady. In fact, I would say there's been a mild increase, and we feel very good about it. And as I mentioned earlier, we've really had no pricing to speak of. And I think that speaks well of our value positioning. It also speaks well of the discipline of our franchisees. And I think it also shows confidence that they're right behind what we're doing. And John Costello, who's sitting with me on the right, was with a bunch of them last night at the Liverpool-Roma soccer match. And yes, they were talking about record profits, and they were in great spirits. So I think that actually -- and I actually came back on a plane last night with a franchisee who was saying the same thing. So all this, I think, shows our business is in great shape all the way around.

John H. Costello

And I think the key to Nigel's point, so traffic trends have been constant. Just to reinforce what Nigel said, they have been -- traffic trends are good in both the morning and the p.m. day part. So our p.m. strategy is working. There are ups and downs by the weather. The warm weather helps, but also cold rainy days, which happen periodically, don't help us. The other point -- so what you're seeing is broad-based ticket and traffic growth throughout the country and in both the morning and rest-of-day day part. And also noteworthy is the fact that franchisees essentially held prices in Q2. So the ticket growth that we're seeing is primarily due to mix shift as we continue to grow our Sandwich business and Cold Beverage business.

John S. Glass - Morgan Stanley, Research Division

That's helpful. If I could just one other question regarding the Baskin-Robbins International and the plant closure. How is this going to impact your P&L? In other words, it sounds like you're going to do some cost savings because you don't have the manufacturing, but it's ultimately a lower margin business because you buy -- it's not a bad thing necessarily because the return is high, but you buy ice cream and then you resell it and that margin is going to be thinner than you made before. Is that -- but the returns are higher, is that the right way to think about it?

Neil Moses

No, actually, the margins are actually going to expand as a result. We're going to be able to buy ice cream cheaper than we could produce it ourselves. And so when we resell it to our international franchisees and licensees basically at the same prices that we've sold it to them before, we will make more margin on it. And we think we'll make between $4 million and $5 million additional margin per year.

Nigel Travis

I think, John, I just have one point there is we try to keep our business really simple. And running a manufacturing operation when you're basically a retail business is a complication that I'll personally be pleased to remove because it means we could stay totally focused on driving comps and profitability at store level.

Operator

Our next question comes from Andy Barish.

Andrew M. Barish - Jefferies & Company, Inc., Research Division

I was wondering on Giorgio's efforts, as it's shown up in the Dunkin' International, I think you mentioned supply chain, is there kind of an investment spend number that you guys are willing to share here for 2012? And does that recur again in 2013 or is this sort of really a heavy investment spending year, and then you can maybe get a little bit of that back starting next year?

Nigel Travis

Okay. So, Andy, firstly, I'd say that Giorgio's doing a spectacular job both on tackling some of the issues we've got and also building the business. In terms of building the business, we have increased some of our expenditure on G&A. And indeed, we've actually also added some marketing support to different regions of the world. One of the things that international clearly has that's different from the U.S. is it doesn't have the national media spend like we have in Dunkin' U.S. So we have invested in marketing globally this year. I think we see this as a pretty quick payback in subsequent years. And to answer the last part of your question, I would say that it's not going to be reduced in subsequent years because I think we needed a higher run rate of expenditures to support the business, and all those investments are being factored into our forward guidance. And I'll be straightforward with you, in our board, as well as me, and I'm a member of the board, thinks we should continue to invest in international. And I think we will get a very fast return for that investment. And the investment, as I say, is marketing, is supply chain, is operations. And as I look back, we tackled Dunkin' U.S. and Baskin U.S., when I look at international through a microscope, it was probably under invested in, in the past, so we're bringing it out to an appropriate level. And the other point I'd make is we've recruited people who, in my view, are a much higher level, and I think you'll see in the future down the road much better results as a result of that investment.

Operator

Our next question comes from Jeffrey Bernstein.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Two questions. Just, first, Nigel, you focused on the 4% to 5% U.S. Dunkin' comp guidance for this year. It seems like you're tracking a little ahead of that in the first half, but I know you put some emphasis on your confidence in still achieving that with a more difficult compare. So I was just wondering whether we can get perhaps a little more color, first, I need to know if perhaps the second quarter was in line with what you were thinking internally and maybe some color as you lap the K-Cup. I think you mentioned more ad weighting in the second half versus the first, but I'm just wondering how you think about or the confidence you have in still being able to achieve that especially if there's no pricing likely, and then I have a follow-up.

Nigel Travis

Okay. So I'll start and then I'll let John continue. As I said, Q4 last year and Q1, we had some favorable weather, and I think we also benefited from the price increases that we implemented earlier last year. And as I've said, and you just commented on, Q2 really had no pricing impact. It did have the trade-up factor because we had a spectacular performance on Breakfast Sandwiches, and in fact, also Bakery Sandwiches were extremely pleasing. And as a result of that, you see some trade up because they tend to be higher priced. So when we look at the second half of the year, as I said, we're going against stronger comparisons not just on a 1-year basis, but when you study 3- and 4-year comps, you see that we're going against strong numbers. But we feel very confident. So we're going against, firstly, higher comps from the past in the second half compared with the first half, but we feel that we've got a range of plans in place that are very aggressive. I won't repeat what I said before about our product news and all that. But K-Cups, we've got a range of tactics that we think are going to work. I personally think our K-Cup performance has been actually outstanding. And we're coming back into a seasonality now that is more favorable to K-Cups based on what we hear from Green Mountain. I mean, obviously, this time last year, we were just starting to test K-Cups. So we're not quite through a full year and so we haven't got all our own data yet, but clearly towards the end of the year is when K-Cups get stronger. And I think there's, John, there's also a lot of evidence to show that it correlates well with hot coffee. So obviously, as the weather gets cooler at the back end of the year, that should be helpful. And I like this idea of LTOs on K-Cups. That seems to give excitement, it brings new news. It, if you like, smartens up the display at store level. And one of things there is we're getting new merchandisers in a large number of stores, which will mean that we merchandise the K-Cups better. And then all that is excluding mobile, which as I said I won't give you details for competitive reasons, but we're excited about that. I know for one the benefit of technology from my days at Papa John's, so we feel good despite the strong comparisons. John?

John H. Costello

Yes, bottom line, we feel good about the comp guidance. We touched on, our marketing spending is slightly backloaded, so we're well covered there. We'll have a range of proven product news across key breakfast and afternoon categories. We will also have merchandising and product news on K-Cups, which are rolling out, as well as the benefit of mobile, which is on track to roll out in Q3 as promised. So we think we're well covered. You add onto that the operational improvements that are being implemented across our U.S. Dunkin' stores gives us confidence in delivering on our comp guidance.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

And if I could just follow up, you mentioned and you talked specifically about the K-Cups. I'm just wondering 2 things. One why not perhaps sell those Dunkin' Donuts K-Cups in other Western Baskin-Robbins markets like you talked about in California? And second, how do you think about Starbucks' rollout, how that'll impact you and the category? Some have said it could actually be a net positive for the category and actually help you in your sales as we move through the back half with just increased promotion around it and marketing?

Nigel Travis

Okay, I'll take the first one on K-Cups and Baskin, and then John will answer the one about Starbucks and supermarkets. Firstly, we're kind of excited about rolling out in the Baskin-Robbins stores in California, the K-Cups. I think the last count, and this may not be an exact number, I think we have 492 stores in California. It's a heartland of Baskin. As I've said earlier, it's also the state with the best grocery sales of coffee. So they seem to like Dunkin' Donuts coffee, but, of course, I would say who wouldn't? So we're excited about that. I'm sure we're going to get franchisees asking, "Can we move it to other states." It's always difficult to draw the line in these situations, but so far it's my decision that we won't take it outside of California, and we'll see how things go. We'll discuss it with our franchisees if we get to that situation where the demand is excessive and we do really well in California. But right now, we're totally focused on making that launch highly successful. And to me, the biggest benefit of it is as we continue to turn around the Baskin business, this is going to help our biggest state with more revenue. And if it has even 1/4 of the impact that it had on Dunkin' Donuts in new markets, we'll be delighted.

John H. Costello

Yes, in answer -- to build on Nigel's comments in your question on K-Cups, I think it's important to remember that K-Cups are still in the very early stages of their development. We've only had them in our restaurants for 11 months. But also total U.S. penetration of current brewers is still relatively low. So we think we're going to continue to benefit from growth in the category. And to specifically address your competitive question, we think the increased competitive advertising and awareness will help grow the category, and we're very confident with the strength of Dunkin's coffee blends that will continue to capture a great share of that growth. And then you layer on to that our own personal initiatives with national advertising behind K-Cups, the increased merchandising tools that Nigel mentioned as well as our LTO product news makes us optimistic about the continued growth of K-Cups on Dunkin'.

Operator

Our next question comes from Joe Buckley.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Had a couple of very specific numbers questions to start and then maybe something in addition. Just in the Dunkin' Donuts U.S. segment data, the franchise fee growth again is pretty strong relative to the system-wide sales growth. And I think we've talked about that in the past of being a function of the remodel program. So I wonder if you could just update us on that and where you are with the remodel program. And then the other revenue line was up about $3 million year-over-year. I'm just kind of curious the driver of that for the Dunkin' U.S. segment.

Paul C. Carbone

Yes, thanks, Joe. Let me start with your second question. The other revenue growth, the $3 million, is the addition of company-owned stores. So that's where the sales of our company-owned stores flow into. So compared to last year, second quarter, we have additional stores in Atlanta and then some additional stores in Dallas. So that's the other revenue. On the franchise fee increase, it's a combination of both the remodels as we sell more term and then just as stores open up and the mix of stores as they pay opening fees. From a year-to-date on remodels, we have about 260 completed year-to-date versus about 250 last year.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay, and how much of the system is remodeled at this point, what percentage?

Paul C. Carbone

Well, the average age of the image is about 5 years.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay, and then a question on the share repurchase authorization and the kind of adjustments in the credit agreement. How should we think about that? Do you expect to be active in the market, or is this sort of restructuring with respect to financial sponsors' remaining ownership and possibly participating in their exit strategy.

Paul C. Carbone

Well, relevering the balance sheet and, as we spoke to, is to buy back shares, and it gives us the right for either open market or from the sponsors. Certainly, as we think about open market and the float that's out there and taking liquidity out of the market, we've talked about that's not necessarily our #1 target. So what's interesting to us is if there was another equity offering from the sponsors, although there are none planned, and what we are doing on our end is just getting the capital structure and the balance sheet ready if that does occur.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay, maybe one last one if I could. You talked about the lack of pricing. McDonald's has gotten more aggressive with $1 any size coffee in about -- I think in about 2/3 of their stores. Have you guys responded to that in any markets, or is there any potential pressure on pricing in the stores?

John H. Costello

This is John. We are seeing aggressive pricing from various competitors in various markets. And as you saw from our broad-based traffic and ticket growth throughout the United States, we're actually weathering that competition quite well and are confident with our ability to grow in the face of that competition. We do, do targeted discounting only for trial reasons. So, for example, we ran a $0.99 Iced Tea promotion this past April as a trial builder. But I think what you're seeing is our franchisees have done a terrific job of holding prices over the past year, particularly in the beverage category. And I think our combination of great products at a great value in a very fast, friendly environment is enabling us to grow the business without getting pulled into that kind of discounting. So we're very aware of it. We evaluate it in a market-by-market basis and so far feel very good about our trends in the face of that.

Operator

Our next question comes from Michael Kelter.

Michael Kelter - Goldman Sachs Group Inc., Research Division

I was curious on the 4% Dunkin' U.S. same-store sales. How much lower was the comp in the Northeast versus the emerging regions? That seems to be growing -- much higher rates.

Neil Moses

Michael, it's Neil. We don't typically disclose the specifics of comps by region. But as we've said in the past, we have out-comped the Northeast in our established markets and more so actually in our emerging and West markets, and that trend has continued.

John H. Costello

But I think it's important to note a couple of years ago, there was a concern about could we replicate the strength of our business beyond the Northeast. And several years ago, our comps were, in many cases, lower outside of the Northeast. So I think what you're seeing is the power of expanding the Dunkin' business. I think the other point worth noting is because of our stronger average weekly sales in the Northeast, while the comps outside of the Northeast are larger, the actual revenue growth that we're seeing in our core Northeast markets, dollar revenue growth has been very solid.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then on G&A, which is up about 7% through the first half of the year, which is higher than you guys initially anticipated for 2012. What's -- is there anything one-off or is this a new higher run rate given the various investments you're making in the business?

Paul C. Carbone

Yes, Michael, this is Paul. So there are several one-offs in the G&A that's kind of outlined as we do the adjustments. Certainly in the first quarter, we had about $1 million of follow-on offering expenses that fall into G&A. In the second quarter, it was much more significant. We had about another $1.3 million in follow-on offering expenses. We had about $3.7 million in big scoop expenses at [ph] the close down of the Peterborough plant. We call it the "project big scoop." And then the vertical legal reserve was almost $21 million. Additionally, as we increase company-owned stores, right, the expenses -- so Joe asked a question about other revenue and that was the revenue from company-owned stores. Additionally, all the expenses from company-owned stores flows through other expenses, which rolls into G&A. I mean, that also drives up our G&A number. So what I would say from a run rate perspective is you should think about taking out the onetimers that I mentioned, and then that is kind of where we talked about the run rate being forward.

Michael Kelter - Goldman Sachs Group Inc., Research Division

One last one. You guys had previously talked about locking in your floating rate debt at a fixed rate. Is that still in the works? And if so, given the current market rates, what's that going to cost you?

Paul C. Carbone

So we talk about that -- and we just had our board meeting, we talked about with the board just a couple of days ago. So we have not instituted that yet. But it's something that we look at, I'd say, almost monthly. Today, if we were to lock in the rates, we would lock in at about 4.5%. So we could swap our 4% debt out at 4.5%, so that would be the incremental 50 basis points. And we have talked about internally we probably don't need to hedge all of the debt, somewhere probably about 50% of the debt is we think about it. But we haven't undertaken that yet, and we continue to talk to both the audit committee and the full board about it.

Nigel Travis

But I think it's important to say no decision has been made, correct.

Neil Moses

And I think, the other important point is that if we did that in conjunction potentially with a share buyback, the net transaction would be quite accretive.

Operator

Our next question comes from Michael Gallo.

Michael W. Gallo - CL King & Associates, Inc.

You're going to be adding Dunkin' K-Cups in California, which should be -- which should help the comps somewhat. I was wondering, the comp guidance seems to imply flat to negative comps in the back half of the year. Is there something you're seeing there or just some conservatism as you start to cycle? Obviously, in the fourth quarter, you had some favorable weather impact.

Paul C. Carbone

Michael, Paul Carbone. So I would say that it's nothing that we're seeing. There is some conservatism there. And then as you called out, as we roll through the back half of the year, we have the biggest, the hardest compares in BR. And actually, Q4 last year was a plus 5.8. So I would say it is nothing we're seeing. Secondly, a dose of conservatism, and thirdly, hopefully we will overdeliver as we've shared with you.

Nigel Travis

So I'll just add to that. Obviously, on Baskin, we had positive unit growth in the quarter. I think what I would say is you're not going to see positive unit growth every quarter because we're still in this transition stage. We've made unbelievable progress with Baskin, but it's still a tough business to predict because it is much more impacted by weather than Dunkin'. Having said that, I mean, I was in a store in Hollywood, Florida, yesterday and the franchisee has just done a remodel. His sales were up, unbelievable amounts. They were excited, they were new to the system, and that's what we're doing. We're transitioning some of these older franchisees. This store had been in place for 45 years. It looked terrific. The customers we were talking to, they couldn't believe the change. So it's happening store by store. And a couple of years ago, the business was in a pretty poor state. I'd say it's in an excellent state, but it's not yet of a state where we can be highly confident and predict the future.

Michael W. Gallo - CL King & Associates, Inc.

Okay. Great. And then just a follow-up question on Dunkin' International. Paul, the decline in segment operating profit, I know you touched on some increased marketing on Dunkin' International. Was there anything else going on there, or what drove that decline?

Paul C. Carbone

Yes. So it's a combination of increased Dunkin' marketing. Also, we've added in some people, some headcount, so that's really the big piece. And with that segment, certainly on a quarterly basis, it's a small segment. So if you add 2 or 3 people as you roll over the prior year, it's quite an impact. But to the earlier question, the way you should think about Dunkin' International and the international spending is not that it rolls off next year so -- because a lot of it is resources and people, so it will stay. The way you should think about it is, the thought is we start getting paid back for that investment next year so we get a better top line.

Just a couple of clarification questions. First on Dunkin' U.S. business. Nigel, I think you mentioned there was an uptick in traffic in your response to one of the prior questions. I just wanted to clarify what you meant by that. Was Q2 same-store traffic better than in Q1? And if you're making any weather adjustments, any clarification related to that would be helpful.

Nigel Travis

No, I think what I've said was that our growth in Q2 was up with both ticket and traffic. And in your comparison between quarters, we don't break down the numbers like that, but both quarters were up, let's say, fairly consistently. And we're pleased with the overall trend so far this year. So that's the kind of trend we expect to see in the future with the kind of marketing programs that we outlined earlier.

Neil Moses

I think the other thing that's important is that when we talk about our business, we talk about it year-over-year not sequentially because of the seasonality associated with the business.

Understood, okay. And then secondly, on the buyback, it sounds like maybe that, that could be lumpy given the strategy around potentially buying shares back from the sponsors. So are you including any buybacks in your forecast for this year's earnings estimates or earnings per share estimates?

Paul C. Carbone

No. So we haven't included the buyback nor have we included the incremental interest expense because as we see this, it's all one transaction that will be accretive. But we have a length of time before we have to pull down the term loan, and they will be in conjunction. So neither the share repurchase nor the incremental interest is currently in our estimates.

Operator

Our next question comes from John Ivankoe.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Firstly, and I just have a couple, I think, fairly small questions here. Your store growth for fiscal '13 Dunkin' U.S. has maintained 260 to 280 despite what was obviously a fairly large and unexpected, from us at least, that closure in the quarter. So, I mean, what does that mean for 2013 as you're beginning to think about those numbers? I mean, is that -- I don't want to put numbers in your mouth, but is it like a 350, 400 number? I mean, or what are you kind of comfortable talking about in terms of what might be a potential acceleration in the '13 from the '12 level?

Nigel Travis

Okay. So I'll just repeat 1 or 2 facts. The closure of the gas and convenience chain stores was something that we initiated, and it's something that we're pleased we've done because it opens up an area in the middle part of the country for some more traditional stores, which obviously have a greater benefit over the long term in terms of royalties and fees. Secondly, we feel very confident in the 260 to 280 this year. And I think what I've said to you, John, I said at the Analyst Day, is that we will continue as far as we can see to continue to grow year by year in terms of store development. We're not giving out specific numbers for 2013. I think at previous discussions, certain people are saying, "Where are they going to get to 500?" And I think my answer has always been, "We're not going there quickly, but we will steadily build year by year." And I think an expectation, without being too exact, is if you look at the last 2 years, we grew from 206 to 243. This year we're growing from 243 to 260/280, and I would expect to see a similar improvement next year.

Neil Moses

Just add onto that. It's Neil. First of all, the closure of these stores was in our plan. And secondly, I think what we said publicly is we're headed towards 5% net unit growth on a base of about 8,000 stores here in the next 3 years. So that's our objective.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Okay, understood, great. And then secondly, I know, I mean, you're launching a mobile app, and certainly I'm looking forward to seeing that and using that. But, I mean, how might that have loyalty benefits? Could it be tied in with the card? I mean, is it going to be, like, kind of a nationally advertised launch, or is it going to be something that one would have to see into the stores or on iTunes, whatever it might be, to kind of get that. So just want to get a sense of what the value is going to be to the customer, when that's lapped, and what you think the uses might be.

Nigel Travis

Okay. So you asked a lot of good questions there, which unfortunately I'm not going to answer any of them because we want to be very clear. We're doing all our testing with our app. We want to make sure it's right before we go out with any pronouncements about it. We're excited about it, and we believe it will -- it's a natural extension to all the work we've done improving systems in our stores. It will reinforce everything that Dunkin' Donuts is great at, which is about value. It's about obviously building frequency and spend, and most of all, it's about speed for our consumers because as we've said on previous calls, one of our greatest qualities is our speed of transaction. But I'm not going to talk anything about the launch.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Okay, I understood -- and you did say that in your prepared remarks, but I thought I'd try anyway.

Nigel Travis

John, at least I'm consistent for one.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Yes, you are. And then finally, if I just -- I wanted to have a little follow-up on Joe's question regarding kind of backing into the franchise fees for the gross unit openings at Dunkin' in the U.S. I mean, just from a modeling perspective, I mean, I know at one point we kind of talked about using 60,000 a store as in average, but it's kind of been 90s, up even in excess of 100 in some quarters. I mean, what do you think is like the run rate? I mean, if I can ask -- I mean, because it does matter, I mean, obviously, especially on that store growth. But 2013, I mean, is that where the number normalizes, or does that not normalize kind of to that -- to that expected run rate level for some time beyond 3 to 5 years, for example?

Paul C. Carbone

Yes, John, good question. I think it normalizes probably as we're learning as we ramp up remodels, probably a little bit higher than the 60. I don't think it will be in the 90 as we go through these remodels and we sell term. And we have a big number last year, a big number this year. So I think it's going to end up normalizing a little bit higher than that. And in the end, while this one is a tough one to predict, it is the length of term the franchisee buys, it is up to them. We give them a couple of options. And needless to say, when we're driving great comps in great store, new store development numbers, they buy more and more term at each individual remodel. So I would say it's going to be a little bit higher than the 60 we've talked about, forward looking, but probably not as high as the 90 that it's been.

Operator

That does conclude our Q&A session for today.

Nigel Travis

Okay. So I'd like to thank everyone for joining us today. We feel good about our business. It's obviously been a pretty hyperactive quarter in terms of all the activity. I think I'd conclude by saying that the Baskin-Robbins manufacturing closure makes our business even more asset light, and I think it's a model that people like. Fundamentals of our business is terrific. We're very focused on improving shareholder value, and I think that's demonstrated by the share buyback announcement. And we look forward to another great quarter and talking to you in 3 months. Thank you.

Operator

Ladies and gentlemen, we thank you for participating in today's conference. This concludes the call. You may now disconnect. Have a good day.

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